In Chapter 3, we examined the financial aspects of drug development.
Here are the key concepts:
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Biotech vs. Pharma: Small biotech companies are often assumed to focus on early stage R&D while pharma is thought to focus on late-stage and commercializations, but those definitions have been blurred. Pharmas can do everything. Biotech companies can, too. The difference that’s most relevant is that while a pharma has revenues from existing marketed drugs to draw on to fund its work, most biotech companies are comparatively recently formed companies that do not yet have a drug on the market and are not yet profitable.
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Funding for Drug Development: The private sector (venture capitalists, companies), not the government, funds most drug development. Investors take on high risks across a portfolio of bets hoping to receive high returns from the few successful ones.
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Investor Decisions: Investors use complex calculations, implicitly or explicitly (e.g., NPV modeling) to assess risks and potential returns before deciding to fund a drug’s development. They consider factors like market size (price and volume), competition, probability of success, time to market, and development costs.
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Net Present Value: NPV is a financial model used by investors to estimate the profitability of a potential drug. It considers factors like revenue, costs, and the time value of money.
New drug prices are high due largely to the high cost and risk associated with their development. In the next chapter, we’ll look at the issue of affordability in more depth.